Illustrative Financial Statements

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2 Illustrative Financial Statements This section of Financial Reporting Framework for Small- and Medium-Sized Entities Implementation Resources contains sample financial statements intended to illustrate financial statements prepared under the FRF for SMEs accounting framework. Sample financial statements, including notes to the financial statements, are presented below. The set also contains financial statements based on accounting principles generally accepted in the United States of America (U.S. GAAP). During the AICPA staffs outreach efforts related to the FRF for SMEs accounting framework, users of financial statements and other stakeholders asked for comparisons of financial statements prepared under the framework to those prepared under U.S. GAAP. These are presented for comparative purposes. These sample financial statements are included for illustrative purposes and are not intended to establish reporting requirements. Furthermore, the dollar amounts shown are illustrative only and are not intended to indicate any customary relationship among accounts. The sample financial statements do not include all of the accounts and transactions that might be found in practice. The notes indicate the subject matter generally required to be disclosed, but should be expanded, reduced, or modified to suit individual circumstances and materiality considerations. In the following illustrative financial statements based on the FRF for SMEs accounting framework, it is presumed that the management of Alpha Contractors, Inc. and subsidiary evaluated the financial reporting needs and responsibilities of their business and determined that the FRF for SMEs accounting framework was a suitable accounting option to use in the preparation of their financial statements.

3 Alpha Contractors, Inc. and Subsidiary Comparative Financial Statements December 31, 20X2 and 20X1 Based on the FRF for SMEs Accounting Framework Primary differences between the Alpha Contractors illustrative financial statements based on the FRF for SMEs accounting framework and those based on U.S. GAAP are in the financial statements based on the FRF for SMEs accounting framework, Alpha Contractors adopts the taxes payable method for accounting for income taxes. In the U.S. GAAP presentation, Alpha Contractors is required to follow the deferred taxes method, including the accounting guidance for uncertainty in income taxes, and makes the related disclosures. the financial statements based on the FRF for SMEs accounting framework do not include the "Impairment of Long-Lived Assets" disclosure in the summary of significant accounting policies that is contained in the U.S. GAAP-based financial statements. The FRF for SMEs accounting framework does not require impairment testing of long-lived assets. Note: No supplemental schedules, which are commonly prepared to accompany or supplement the basic financial statements, have been prepared as part of this illustration.

4 Independent Auditors Report To the Stockholders Alpha Contractors, Inc. and Subsidiary We have audited the accompanying consolidated financial statements of Alpha Contractors, Inc. and Subsidiary, which comprise the consolidated statements of assets, liabilities, and equity as of December 31, 20X2 and 20X1, and the related consolidated statements of revenue, expenses, and retained earnings, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants, described in Note 1; this includes determining that the Financial Reporting Framework for Small- and Medium-Sized Entities is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alpha Contractors, Inc. and Subsidiary, as of December 31, 20X2 and 20X1, and the results of its operations and its cash flows for the years then ended in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities, described in Note 1. Basis of Accounting We draw attention to Note 1 of the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. [Signature of Accounting Firm] Greenville, South Carolina February 18, 20X3

6 Alpha Contractors, Inc. Consolidated Statements of Assets, Liabilities, and Equity (FRF for SMEs Accounting Framework Basis) December 31, 20X2 and 20X1 Assets 20X2 20X1 Cash and cash equivalents $304,400 $221,300 Contracts receivables 3,789,200 3,334,100 Costs and estimated earnings in excess of billings on 156, ,600 uncompleted contracts Inventory 89,700 99,100 Prepaid charges and other assets 118,400 83,200 Total current assets 4,458,600 3,838,300 Advances to and equity in joint venture 205, ,700 Note receivable, related company 175, ,000 Property and equipment, net of accumulated 976,400 1,019,200 depreciation and amortization Total long term assets 1,357,000 1,299,900 Total assets $5,815,600 $5,138,200 See independent accountants audit report and notes to consolidated financial statements.

7 Liabilities and Shareholders' Equity Liabilities 20X2 20X1 Current maturities of notes payable $110,300 $110,300 Current portion of lease obligations payable 62,250 57,250 Accounts and retentions payable 2,543,100 2,588,500 Billings in excess of costs and estimated earnings on uncompleted contracts 242, ,700 Accrued loss on uncompleted contract 76,700 - Other accrued liabilities 88, ,600 Total current liabilities 3,122,950 3,092,350 Notes payable, less current maturities 357, ,100 Lease obligations payable, less current portion 135, ,050 Long-term accrued liabilities 154,200 26,200 Total long term liabilities 647, ,350 Total liabilities 3,770,300 3,780,700 Shareholders' equity Common stock$1 par value, 500,000 authorized 300, ,000 shares, 300,000 issued and outstanding shares Retained earnings 1,745,300 1,057,500 Total shareholders' equity 2,045,300 1,357,500 Total liabilities and shareholders' equity $5,815,600 $5,138,200 See independent accountants audit report and notes to consolidated financial statements.

8 Alpha Contractors, Inc. Consolidated Statements of Revenues, Expenses, and Retained Earnings (FRF for SMEs Accounting Framework Basis) Years Ended December 31, 20X2 and 20X1 20X2 20X1 Contract revenues earned $9,630,800 $6,225,400 Cost of revenues earned 7,436,100 4,951,300 Gross profit 2,194,700 1,274,100 Selling, general, and administrative expense 895, ,600 Income from operations 1,299, ,500 Other income (expense) Equity in earnings from unconsolidated joint 49,900 5,700 venture Gain on sale of equipment 10,000 2,000 Interest expense (net of interest income of (69,500) (70,800) $8,800 in 20X2 and $6,300 in 20X1) Total other expense (9,600) (63,100) Income before current year tax expense 1,289, ,400 Income tax expense 451, ,900 Net income 837, ,500 Retained earnings, beginning of year 1,057,500 1,053,000 1,895,300 1,207,500 Less: Dividends paid (per share $.50 [20X2]; 150, ,000 $.50 [20X1]) Retained earnings, end of year $1,745,300 $1,057,500 See independent accountants audit report and notes to consolidated financial statements.

9 Cash flows from operating activities: Alpha Contractors, Inc. Consolidated Statements of Cash Flows (FRF for SMEs Accounting Framework Basis) Years Ended December 31, 20X2 and 20X1 Net income $837,800 $154,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 167, ,500 Provision for losses on contract receivables 6,300 1,100 Gain on sale of equipment (10,000) (2,000) Equity earnings from unconsolidated joint venture (49,900) (5,700) Increase in long-term accrued liabilities 128,000 26,200 Increase in contract receivables (461,400) (10,200) Increase in costs and estimated earnings in excess of billings on uncompleted (56,300) (8,000) contracts Increase in billings in excess of costs and estimated earnings on uncompleted 20,300 18,500 contracts Decrease (increase) in inventory 9,400 (3,600) (Increase) decrease in prepaid charges and other assets (35,200) 16,100 (Decrease) increase in accounts and retentions payable (45,400) 113,200 Increase in accrued loss on uncompleted contract 76,700 - (Decrease) increase in other accrued liabilities (26,000) 18,800 Net cash provided by operating activities 562, ,400 Cash flows from investing activities: Proceeds of equipment sold 25,000 5,000 Acquisition of equipment (140,000) (175,000) Advances to joint venture (25,000) (9,700) Advances to related company (25,000) (50,000) Net cash used in investing activities (165,000) (229,700) Cash flows from financing activities: Principal payments on notes payable (110,300) (90,300) Principal payments under capital lease obligations (53,700) (9,700) Cash dividends paid (150,000) (150,000) Net cash used in financing activities (314,000) (250,000) Net increase (decrease) in cash and cash equivalents 83,100 (7,300) Cash and cash equivalents at beginning of year 221, ,600 Cash and cash equivalents at end of year $304,400 $221,300 See independent accountants audit report and notes to consolidated financial statements. 20X2 20X1

10 Alpha Contractors, Inc. Notes to Consolidated Financial Statements December 31, 20X2 and 20X1 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying financial statements have been prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants, which is a special purpose framework and not U.S. generally accepted accounting principles (U.S. GAAP). The accounting principles that compose the framework are appropriate for the preparation and presentation of small- and medium-sized entity financial statements, based on the needs of the financial statement users and cost and benefit considerations. This special purpose framework, unlike U.S. GAAP, does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities. Nature of Operations The Company is engaged in the construction of industrial and commercial buildings primarily in the southeastern region of the United States. The Company's work is performed under cost-plusfee contracts, fixed-price contracts, and fixed-price contracts modified by incentive and penalty provisions. These contracts are undertaken by the Company or its wholly owned subsidiary alone or in partnership with other contractors through joint ventures. The length of the Company's contracts varies but is typically about two years. The Company follows the practice of filing statutory liens on all construction projects when collection problems are anticipated. The liens serve as collateral for contracts receivable. Use of Estimates The preparation of financial statements in conformity with the Financial Reporting Framework for Small and Medium-Sized Entities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Statement of Assets, Liabilities, and Equity Classification The Company includes in current assets and liabilities retainage amounts receivable and payable under construction contracts, which may extend beyond one year. A one-year time period is used as the basis for classifying all other current assets and liabilities. See independent accountants audit report

11 Principles of Consolidation The consolidated financial statements include the Company's majority-owned entity, a wholly owned corporate subsidiary (Beta Building). All significant intercompany transactions are eliminated. Income from Beta Building was $212,300 in 20X2 and $35,900 in 20X1. The Company has a noncontrolling interest in a joint venture (partnership), which is reported on the equity method. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Contracts Receivable Contracts receivable from performing construction of industrial and commercial buildings are based on contracted prices. The Company provides an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. Inventory Inventory consisting of building materials is stated at the lower of cost (first in, first out method) or net realizable value. Property and Equipment Property and equipment are stated at cost. Depreciation is computed primarily using the straightline method over the estimated useful lives of the assets, which range from 5 to 39 years. Leasehold improvements are amortized over the shorter of the useful life of the related assets or the lease term. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is reflected in income for the period. Revenue and Cost Recognition Revenues from fixed price construction contracts are recognized on the percentage of completion method, measured on the basis of incurred costs to estimated total costs for each contract. This cost to cost method is used because management considers it to be the best available measure of progress on these contracts. Revenues from cost-plus fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost to cost method. See independent accountants audit report

12 Revenue and Cost Recognition (Continued) The financial statements include some amounts that are based on managements best estimates and judgments. The most significant estimates relate to costs to complete long-term contracts. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. The asset, "costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Union-Sponsored Pension Plan The Company participates in a union-sponsored pension plan (ABC Pension Fund), which is a defined benefit plan that covers union employees. Contributions to the plan are based on a fixed rate per hour worked. Pension expense under this plan was $550,000 and $500,000 for the years ended December 31, 20X2 and 20X1, respectively. Income Taxes For financial reporting purposes, the Company has elected to use the taxes payable method. Under that method, income tax expense represents the amount of income tax the Company expects to pay based on the Companys current year taxable income. Current year taxable income varies from income before current year tax expense primarily due to the use of the completed-contract method and the use of an accelerated depreciation method for tax reporting purposes. Business tax credits are applied as a reduction to the provision for federal income taxes using the flow-through method. Evaluation of Subsequent Events The Company has evaluated subsequent events through February 18, 20X3, which is the date the financial statements were available to be issued. See independent accountants audit report

13 2. CONTRACTS RECEIVABLE fn 1 Billed December 31, 20X2 December 31, 20X1 Completed contracts $621,100 $500,600 Contracts in progress 2,146,100 1,931,500 Retained 976, ,200 Unbilled 121, ,400 Less: Allowances for doubtful collections 3,865,100 3,403,700 75,900 69,600 $3,789,200 $3,334,100 Analysis of the changes in the allowance for doubtful collections. 20X2 20X1 Balance at January 1 $69,600 $68,000 Additions charged to operations 6,300 1,100 Direct write-downs 500 Recoveries Balance at December 31 $75,900 $69,600 Contracts receivable at December 31, 20X2, include a claim, expected to be collected within one year, for $290,600 arising from a dispute with the owner over design and specification changes in a building currently under construction. The changes were made at the request of the owner to improve the thermal characteristics of the building and, in the opinion of counsel, gave rise to a valid claim against the owner. The retained and unbilled contracts receivable at December 31, 20X2, included $38,600 that was not expected to be collected within one year. Contracts receivable include approximately $800,000 due under one contract. See independent accountants audit report

14 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS fn 2 The following is a summary of contracts in progress at December 31, 20X2 and 20X1. 20X2 20X1 Costs incurred on uncompleted contracts $4,346,500 $3,165,400 Estimated earnings 651, ,100 4,998,100 3,671,500 Less: Billings to date 5,083,200 3,792,600 $(85,100) $(121,100) These amounts are included in accompanying consolidated statements of assets, liabilities, and equity under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts Billings in excess of costs and estimated earnings on uncompleted contracts $156,900 $100,600 (242,000) (221,700) $(85,100) $(121,100) See independent accountants audit report

15 4. ADVANCES TO AND EQUITY IN JOINT VENTURE The Company has a noncontrolling interest (one-third) in a general partnership joint venture (XYZ Venture) formed to construct an office building. All of the partners participate in construction, which is under the general management of the Company. Summary information on the joint venture follows. December December 31, 20X2 31, 20X1 Current assets $483,100 $280,300 Construction and other assets 220, , , ,100 Less: Liabilities 236, ,000 Net assets $466,800 $317,100 Revenue $3,442,700 $299,400 Net income $149,700 $17,100 Company's interest Share of net income $49,900 $5,700 Advances to joint venture $50,000 $25,000 Equity in net assets 155, ,700 Total advances and equity $205,600 $130, TRANSACTIONS WITH RELATED PARTY The note receivable, related company, is an installment note bearing annual interest at 9 percent, payable quarterly, with the principal payable in annual installments of $25,000, commencing October 1, 20X4. The major shareholder of the Company owns the majority of the outstanding common stock of this related company, whose principal activity is leasing land and buildings. Alpha Contractors, Inc., rents land and office facilities from the related company on a 10-year lease ending September 30, 20XX, for an annual rental of $19,000. See independent accountants audit report

16 6. PROPERTY AND EQUIPMENT Assets December 31, 20X2 December 31, 20X1 Land $57,500 $57,500 Buildings 262, ,500 Shop and construction equipment 827, ,600 Automobiles and trucks 104,400 89,100 Leased equipment under capital leases 300, ,000 1,552,000 1,436,700 Accumulated depreciation and 575, ,500 amortization Net property and equipment $976,400 $1,019,200 Depreciation expense related to property, plant, and equipment was $158,000 in 20X2 and $148,800 for 20X1. See independent accountants audit report

17 7. FINANCING ACTIVITIES Line of Credit The Company has a line of credit agreement with a bank of $1,500,000. There were no borrowings against the line at December 31, 20X2 and 20X1. The line bears interest at the banks prime lending rate. The line is reviewed annually and is due on demand. Under terms of the line of credit, the Company is required to maintain a specified debt service coverage ratio and debt to tangible net worth ratio, as those terms are defined. Notes Payable The following is a summary of all notes payable. Unsecured note payable to Aztec Bank, due in quarterly installments of $22,575 plus interest at 1% over prime through June 20X7 Note payable to State Bank, collateralized by equipment fn 3 (carrying amount of $150,000), due in monthly installments of $1,667 plus interest at 10% through January 20X7 December December 31, 20X2 31, 20X1 $388,100 $478,400 80, ,000 $468,100 $578,400 Current maturities 110, ,300 $357,800 $468,100 Principal payments on note payables are due as follows. Year ending December 31, 20X3 $110,300 20X4 $110,300 20X5 $110,300 20X6 $110,300 20X7 $26,900 See independent accountants audit report

18 8. LEASE OBLIGATIONS PAYABLE The Company leases certain specialized construction equipment under leases classified as capital leases. The leased equipment is amortized on a straight line basis over 6 years. Total accumulated amortization related to the leased equipment is $100,000 and $50,000 at December 31, 20X2, and 20X1, respectively. The following is a schedule showing the future minimum lease payments under capital leases by years and the present value of the minimum lease payments as of December 31, 20X2. The interest rate related to the lease obligation is 9.3 percent and the maturity date is January 20X5. Year ending December 31 20X3 $76,500 20X4 76,500 20X5 76,500 Total minimum lease payments 229,500 Less: Amount representing interest 31,900 Present value of minimum lease payments $197,600 At December 31, 20X2, the present value of minimum lease payments due within one year is $62,250. Total rental expense, excluding payments on capital leases, totaled $86,300 in 20X2 and $74,400 in 20X1. 9. SURETY BONDS The Company, as a condition for entering into some of its construction contracts, had outstanding surety bonds as of December 31, 20X2 and 20X1. The surety bonds are collateralized by certain contracts receivable and personally guaranteed by the stockholders of the Company. 10. CONTINGENCIES From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Companys financial position. The Company is contingently liable to a surety company under a general indemnity agreement. The Company agrees to indemnify the surety for any payments made on contracts of surety ship, guaranty, or indemnity. The Company believes that all contingent liabilities will be satisfied by their performance on the specific bonded contracts. See independent accountants audit report

19 11. BACKLOG fn 4 The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 20X2 and 20X3, and from contractual agreements on which work has not yet begun. Contract revenues on uncompleted $9,779,900 contracts at December 31, 20X1 Contract adjustments 430,600 Contract revenues for new contracts, 20X2 1,502,700 11,713,200 Less: Contract revenue earned, 20X2 9,630,800 Backlog at December 31, 20X2 $2,082,400 In addition, between January 1, 20X3, and February 18, 20X3, the Company entered into additional construction contracts with revenues of $332,800. See independent accountants audit report

20 Alpha Contractors, Inc. and Subsidiary Comparative Financial Statements December 31, 20X2 and 20X1 Based on U.S. GAAP Primary differences between the Alpha Contractors illustrative financial statements based on the FRF for SMEs accounting framework and those based on U.S. GAAP are in the financial statements based on the FRF for SMEs accounting framework, Alpha Contractors adopts the taxes payable method for accounting for income taxes. In the U.S. GAAP presentation, Alpha Contractors is required to follow the deferred taxes method, including the accounting guidance for uncertainty in income taxes, and makes the related disclosures. the financial statements based on the FRF for SMEs accounting framework do not include the "Impairment of Long-Lived Assets" disclosure in the summary of significant accounting policies that is contained in the U.S. GAAP-based financial statements. The FRF for SMEs accounting framework does not require impairment testing of long-lived assets. Note: No supplemental schedules, which are commonly prepared to accompany or supplement the basic financial statements, have been prepared as part of this illustration.

21 Independent Auditors Report To the Stockholders Alpha Contractors, Inc. and Subsidiary We have audited the accompanying consolidated financial statements of Alpha Contractors, Inc. and Subsidiary, which comprise the consolidated balance sheets as of December 31, 20X2 and 20X1, and the related consolidated statements of income and retained earnings, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

22 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alpha Contractors, Inc. and Subsidiary as of December 31, 20X2 and 20X1, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. [Signature of Accounting Firm] Greenville, South Carolina February 18, 20X3

23 Alpha Contractors, Inc. Consolidated Balance Sheets December 31, 20X2 and 20X1 Assets 20X2 20X1 Cash and cash equivalents $304,400 $221,300 Contracts receivables 3,789,200 3,334,100 Costs and estimated earnings in excess of billings 156, ,600 on uncompleted contracts Inventory 89,700 99,100 Prepaid charges and other assets 118,400 83,200 Total current assets 4,458,600 3,838,300 Advances to and equity in joint venture 205, ,700 Note receivable, related company 175, ,000 Property and equipment, net of accumulated 976,400 1,019,200 depreciation and amortization Total long term assets 1,357,000 1,299,900 Total assets $5,815,600 $5,138,200 See independent accountants audit report and accompanying notes to consolidated financial statements.

24 Liabilities and Shareholders' Equity Liabilities 20X2 20X1 Current maturities of notes payable $110,300 $110,300 Current portion of lease obligations payable 62,250 57,250 Accounts and retentions payable 2,543,100 2,588,500 Billings in excess of costs and estimated earnings on 242, ,700 uncompleted contracts Accrued loss on uncompleted contract 76,700 Current deferred tax liability 594, ,800 Other accrued liabilities 88, ,600 Total current liabilities 3,716,950 3,482,150 Notes payable, less current maturities 357, ,100 Lease obligations payable, less current portion 135, ,050 Long-term accrued liabilities 154,200 26,200 Deferred tax liability 25,200 18,200 Total long term liabilities 672, ,550 Total liabilities 4,389,500 4,188,700 Shareholders' equity Common stock$1 par value, 500,000 authorized shares, 300, , ,000 issued and outstanding shares Retained earnings 1,126, ,500 Total shareholders' equity 1,426, ,500 Total liabilities and shareholders' equity $5,815,600 $5,138,200 See independent accountants audit report and accompanying notes to consolidated financial statements.

25 Alpha Contractors, Inc. Consolidated Statements of Income and Retained Earnings Years Ended December 31, 20X2 and 20X1 20X2 20X1 Contract revenues earned $9,630,800 $6,225,400 Cost of revenues earned 7,436,100 4,951,300 Gross profit 2,194,700 1,274,100 Selling, general, and administrative expense 895, ,600 Income from operations 1,299, ,500 Other income (expense) Equity in earnings from unconsolidated joint 49,900 5,700 venture Gain on sale of equipment 10,000 2,000 Interest expense (net of interest income of (69,500) (70,800) $8,800 in 20X2 and $6,300 in 20X1) Total other expense (9,600) (63,100) Income before provision of income taxes 1,289, ,400 Provision for income taxes 662, ,000 Net income 626, ,400 Retained earnings, beginning of year 649, ,100 1,276, ,500 Less: Dividends paid (per share $.50 [20X2]; $ , ,000 [20X1]) Retained earnings, end of year $1,126,100 $649,500 See independent accountants audit report and accompanying notes to consolidated financial statements.

26 Alpha Contractors, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 20X2 and 20X1 Cash flows from operating activities: Net income $626,600 $230,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 167, ,500 Provision for losses on contract receivables 6,300 1,100 Gain on sale of equipment (10,000) (2,000) Increase (decrease) in deferred taxes 211,200 (75,900) Equity earnings from unconsolidated joint venture (49,900) (5,700) Increase in long-term accrued liabilities 128,000 26,200 Increase in contract receivables (461,400) (10,200) Net (decrease) increase in billings related to costs and estimated earnings on (36,000) 10,500 uncompleted contracts Decrease (increase) in inventory 9,400 (3,600) (Increase) decrease in prepaid charges and other assets (35,200) 16,100 (Decrease) increase in accounts and retentions payable (45,400) 113,200 Increase in accrued loss on uncompleted contract 76,700 (Decrease) increase in other accrued liabilities (26,000) 18,800 Net cash provided by operating activities 562, ,400 Cash flows from investing activities: Proceeds of equipment sold 25,000 5,000 Acquisition of equipment (140,000) (175,000) Advances to joint venture (25,000) (9,700) Advances to related company (25,000) (50,000) Net cash used in investing activities (165,000) (229,700) Cash flows from financing activities: Principal payments on notes payable (110,300) (90,300) Principal payments under capital lease obligations (53,700) (9,700) Cash dividends paid (150,000) (150,000) Net cash used in financing activities (314,000) (250,000) Net increase (decrease) in cash and cash equivalents 83,100 (7,300) Cash and cash equivalents at beginning of year 221, ,600 Cash and cash equivalents at end of year $304,400 $221,300 Supplemental data: Interest paid20x2, $73,500; 20X1, $75,100 Income taxes paid20x2, $478,300; 20X1, $313,200 See independent accountants audit report and accompanying notes to consolidated financial statements 20X2 20X1

27 Alpha Contractors, Inc. Notes to Consolidated Financial Statements December 31, 20X2 and 20X1 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Company is engaged in the construction of industrial and commercial buildings primarily in the southeastern region of the United States. The Company's work is performed under cost-plusfee contracts, fixed-price contracts, and fixed-price contracts modified by incentive and penalty provisions. These contracts are undertaken by the Company or its wholly owned subsidiary alone or in partnership with other contractors through joint ventures. The length of the Company's contracts varies but is typically about two years. The Company follows the practice of filing statutory liens on all construction projects when collection problems are anticipated. The liens serve as collateral for contracts receivable. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Balance Sheet Classification The Company includes in current assets and liabilities retainage amounts receivable and payable under construction contracts, which may extend beyond one year. A one-year time period is used as the basis for classifying all other current assets and liabilities. Principles of Consolidation The consolidated financial statements include the Company's majority-owned entity, a wholly owned corporate subsidiary. All significant intercompany transactions are eliminated. The Company has a noncontrolling interest in a joint venture (partnership), which is reported on the equity method. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. See independent accountants audit report

28 Contracts Receivable Contracts receivable from performing construction of industrial and commercial buildings are based on contracted prices. The Company provides an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. Inventory Inventory consisting of building materials is stated at the lower of cost (first in, first out method) or net realizable value. Property and Equipment Property and equipment are stated at cost. Depreciation is computed primarily using the straightline method over the estimated useful lives of the assets, which range from 5 to 39 years. Leasehold improvements are amortized over the shorter of the useful life of the related assets or the lease term. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is reflected in income for the period. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. As of December 31, 20X2 and 20X1, there were no impairment losses recognized for longlived assets. See independent accountants audit report

29 Revenue and Cost Recognition Revenues from fixed price construction contracts are recognized on the percentage of completion method, measured on the basis of incurred costs to estimated total costs for each contract. This cost to cost method is used because management considers it to be the best available measure of progress on these contracts. Revenues from cost-plus fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost to cost method. The financial statements include some amounts that are based on managements best estimates and judgments. The most significant estimates relate to costs to complete long-term contracts. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. The asset, "costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. See independent accountants audit report

30 Income Taxes Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740. As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Current year taxable income varies from income before current year tax expense primarily due to the use of the completed-contract method and the use of an accelerated depreciation method for tax reporting purposes. Business tax credits are applied as a reduction to the current provision for federal income taxes using the flow-through method. Effective January 1, 20X0, the Company implemented the accounting guidance for uncertainty in income taxes using the provisions of FASB ASC 740. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the positions will be sustained upon examination by the tax authorities. As of December 31, 20X2, the Company had no uncertain tax positions, or interest and penalties, that qualify for either recognition or disclosure in the financial statements. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 20X0. Evaluation of Subsequent Events The Company has evaluated subsequent events through February 18, 20X3, which is the date the financial statements were available to be issued. See independent accountants audit report

31 2. CONTRACTS RECEIVABLE Billed December 31, 20X2 December 31, 20X1 Completed contracts $621,100 $500,600 Contracts in progress 2,146,100 1,931,500 Retained 976, ,200 Unbilled 121, ,400 Less: Allowances for doubtful collections 3,865,100 3,403,700 75,900 69,600 $3,789,200 $3,334,100 The total recorded investment in impaired contracts receivable recognized in accordance with FASB ASC 310, Receivables, was $125,000 in 20X2 and $103,000 in 20X1. These amounts also approximate the average recorded investment in impaired contracts receivable during the related periods. The allowance for credit losses associated with these receivables was $41,000 in 20X2 and $38,000 in 20X1. It is management's policy not to accrue interest income on impaired contracts receivable given past difficulties in collecting such amounts. Interest income on impaired contracts receivable of $1,452 and $1,107 was recognized for cash payments received in 20X2 and 20X1, respectively. For impairment recognized in conformity with of FASB ASC 310, the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Analysis of the changes in the allowance for doubtful collections. 20X2 20X1 Balance at January 1 $69,600 $68,000 Additions charged to operations 6,300 1,100 Direct write-downs 500 Recoveries Balance at December 31 $75,900 $69,600 See independent accountants audit report

32 2. CONTRACTS RECEIVABLE (Continued) Contracts receivable at December 31, 20X2, include a claim, expected to be collected within one year, for $290,600 arising from a dispute with the owner over design and specification changes in a building currently under construction. The changes were made at the request of the owner to improve the thermal characteristics of the building and, in the opinion of counsel, gave rise to a valid claim against the owner. The retained and unbilled contracts receivable at December 31, 20X2, included $38,600 that was not expected to be collected within one year. Contracts receivable include approximately $800,000 due under one contract. 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Following is a summary of contracts in progress at December 31, 20X2 and 20X1: 20X2 20X1 Costs incurred on uncompleted contracts $4,346,500 $3,165,400 Estimated earnings 651, ,100 4,998,100 3,671,500 Less: Billings to date 5,083,200 3,792,600 $(85,100) $(121,100) These amounts are included in accompanying consolidated balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts Billings in excess of costs and estimated earnings on uncompleted contracts $156,900 $100,600 (242,000) (221,700) $(85,100) $(121,100) See independent accountants audit report

33 4. ADVANCES TO AND EQUITY IN JOINT VENTURE The Company has a noncontrolling interest (one-third) in a general partnership joint venture formed to construct an office building. All of the partners participate in construction, which is under the general management of the Company. Summary information on the joint venture follows. December December 31, 20X2 31, 20X1 Current assets $483,100 $280,300 Construction and other assets 220, , , ,100 Less: Liabilities 236, ,000 Net assets $466,800 $317,100 Revenue $3,442,700 $299,400 Net income $149,700 $17,100 Company's interest Share of net income $49,900 $5,700 Advances to joint venture $50,000 $25,000 Equity in net assets 155, ,700 Total advances and equity $205,600 $130, TRANSACTIONS WITH RELATED PARTY The note receivable, related company, is an installment note bearing annual interest at 9 percent, payable quarterly, with the principal payable in annual installments of $25,000, commencing October 1, 20X4. The major shareholder of the Company owns the majority of the outstanding common stock of this related company, whose principal activity is leasing land and buildings. Alpha Contractors, Inc., rents land and office facilities from the related company on a 10-year lease ending September 30, 20X10, for an annual rental of $19,000. See independent accountants audit report

34 6. PROPERTY AND EQUIPMENT Assets December 31, 20X2 December 31, 20X1 Land $57,500 $57,500 Buildings 262, ,500 Shop and construction equipment 827, ,600 Automobiles and trucks 104,400 89,100 Leased equipment under capital leases 300, ,000 1,552,000 1,436,700 Accumulated depreciation and amortization Buildings 140, ,000 Shop and construction equipment 265, ,500 Automobiles and trucks 70,000 42,000 Leased equipment under capital leases 100,000 50, , ,500 Net property and equipment $976,400 $1,019, ACCOUNTS PAYABLE Accounts payable include amounts due to subcontractors, totaling $634,900 at December 31, 20X2, and $560,400 at December 31, 20X1, which have been retained pending completion and customer acceptance of jobs. Accounts payable at December 31, 20X2, include $6,500 that is not expected to be paid within one year. 8. FINANCING ACTIVITIES Line of Credit The Company has a line of credit agreement with a bank of $1,500,000. There were no borrowings against the line at December 31, 20X2 and 20X1. The line bears interest at the banks prime lending rate. The line is reviewed annually and is due on demand. Under terms of the line of credit, the Company is required to maintain a specified debt service coverage ratio and debt to tangible net worth ratio, as those terms are defined. See independent accountants audit report

35 Notes Payable Following is a summary of all notes payable: Unsecured note payable to Aztec Bank, due in quarterly installments of $22,575 plus interest at 1% over prime through June 20X7 Note payable to State Bank, collateralized by equipment fn 5 (carrying amount of $150,000), due in monthly installments of $1,667 plus interest at 10% through January 20X7 December December 31, 20X2 31, 20X1 $388,100 $478,400 80, ,000 $468,100 $578,400 Current maturities 110, ,300 $357,800 $468,100 Principal payments on note payables are due as follows. Year ending December 31, 20X3 $110,300 20X4 $110,300 20X5 $110,300 20X6 $110,300 20X7 $26,900 See independent accountants audit report

36 9. LEASE OBLIGATIONS PAYABLE The Company leases certain specialized construction equipment under leases classified as capital leases. The following is a schedule showing the future minimum lease payments under capital leases by years and the present value of the minimum lease payments as of December 31, 20X2. The interest rate related to the lease obligation is 9.3 percent, and the maturity date is January 20X5. Year ending December 31 20X3 $76,500 20X4 76,500 20X5 76,500 Total minimum lease payments 229,500 Less: Amount representing interest 31,900 Present value of minimum lease payments $197,600 At December 31, 20X2, the present value of minimum lease payments due within one year is $62,250. Total rental expense, excluding payments on capital leases, totaled $86,300 in 20X2 and $74,400 in 20X SURETY BONDS The Company, as a condition for entering into some of its construction contracts, had outstanding surety bonds as of December 31, 20X2 and 20X1. The surety bonds are collateralized by certain contracts receivable and personally guaranteed by the stockholders of the Company. See independent accountants audit report

37 11. INCOME TAXES AND DEFERRED INCOME TAXES The provision for taxes on income consists of the following. December December 31 20X2 31, 20X1 Current $451,700 $300,900 Deferred 211,200 (75,900) Total $662,900 $225,000 The following represents the approximate tax effect of each significant type of temporary difference giving rise to the deferred income tax liability. Deferred tax asset: December 31, 20X2 December 31, 20X1 Employee benefits $44,300 $38,100 Other 10,100 10,600 Total $54,400 $48,700 Deferred tax liability: Earnings on uncompleted contracts $594,000 $389,800 Property, plant, and equipment 64,300 54,100 Other 15,300 12,800 Total $673,600 $456,700 Deferred tax liability, net $619,200 $408, CONTINGENCIES From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Companys financial position. The Company is contingently liable to a surety company under a general indemnity agreement. The Company agrees to indemnify the surety for any payments made on contracts of surety ship, guaranty, or indemnity. The Company believes that all contingent liabilities will be satisfied by their performance on the specific bonded contracts. See independent accountants audit report

38 13. BACKLOG fn 6 The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 20X2 and 20X1, and from contractual agreements on which work has not yet begun. Contract revenues on uncompleted contracts $9,779,900 at December 31, 20X1 Contract adjustments 430,600 Contract revenues for new contracts, 20X2 1,502,700 11,713,200 Less: Contract revenue earned, 20X2 9,630,800 Backlog at December 31, 20X2 $2,082,400 In addition, between January 1, 20X3, and February 18, 20X3, the Company entered into additional construction contracts with revenues of $332,800. See independent accountants audit report

39 14. UNION-SPONSORED PENSION PLAN The Company participates in a union-sponsored multiemployer defined benefit pension plan (ABC Pension Fund) that covers union employees. Contributions to the plan are based on a fixed rate per hour worked. The risks of participating in a multiemployer plan are different from singleemployer plans in the following aspects: a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. c. If the Company chooses to stop participating in the multiemployer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The Companys participation in the multiemployer plan for the annual periods ended December 31, 20X2 and 20X1, is outlined in the following table. The "EIN/Pension Plan Number" column provides the employer identification number (EIN) and the three-digit plan number. Unless otherwise noted, the most recent Pension Protection Act zone status available in 20X2 and 20X1 is for the plan's year-end at December 31, 20X1, and December 31, 20X0, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the green zone are at least 80 percent funded. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. Pension Fund EIN/Pension Plan Number Pension Protection Act Zone Status Contributions of Company 20X2 20X1 20X2 20X1 Expiration Date of Collective Bargaining Agreement ABC Green Green $550,000 $500,000 12/31/20X5 See independent accountants audit report

40 Illustrative CPA Reports To assist CPAs in reporting on financial statements prepared under the FRF for SMEs accounting framework, sample compilation, review, and audit reports are presented in this section. When issuing a report on financial statements prepared in accordance with the FRF for SMEs accounting framework, the following requirements from the AICPAs Professional Standards should be complied with, depending on the nature of the service: Compilation of financial statements: AR-C section 80, Compilation Engagements Review of financial statements: AR-C section 90, Review of Financial Statements Audit of financial statements: AU-C section 800, Special ConsiderationsAudits of Financial Statements Prepared in Accordance With Special Purpose Frameworks These examples are for illustrative purposes only and are nonauthoritative. CPAs should refer directly to the applicable authoritative pronouncements for reporting requirements.

41 Accountants Compilation Report on Comparative Financial Statements Prepared in Accordance with the AICPAs Financial Reporting Framework for Small- and Medium-Sized Entities When the Accountants Independence is Not Impaired. Board of Directors XYZ Company Accountants Compilation Report Management is responsible for the accompanying financial statements of XYZ Company, which comprise the statements of financial position as of December 31, 20X2 and 20X1, and the related statements of operations and cash flows for the years then ended, and the related notes to the financial statements in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants (AICPA), and for determining that the Financial Reporting Framework for Small- and Medium-Sized Entities is an acceptable financial reporting framework. We have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with the AICPAs Financial Reporting Framework for Small- and Medium-Sized Entities, which is a basis of accounting other than accounting principles generally accepted in the United States of America. [Signature of accounting firm or accountant, as appropriate] [Accountants city and state] [Date of the accountants report]

42 Accountants Review Report on Comparative Financial Statements Prepared in Accordance with the AICPAs Financial Reporting Framework for Small- and Medium-Sized Entities. Board of Directors XYZ Company Independent Accountants Review Report We have reviewed the accompanying financial statements of XYZ Company, which comprise the statements of financial position as of December 31, 20X2 and 20X1 and the related statements of operations and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to managements financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error. Accountants Responsibility Our responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the AICPA. We believe that the results of our procedures provide a reasonable basis for our conclusion. Accountants Conclusion Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with Financial Reporting Framework for Small- and Medium-Sized Entities. Basis of Accounting We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with Financial Reporting Framework for Small- and Medium-Sized Entities, which is a basis of accounting other than accounting principles

43 generally accepted in the United States of America. Our conclusion is not modified with respect to this matter.[signature of accounting firm or accountant, as appropriate] [Accountants city and state] [Date]

44 Single Year Prepared in Accordance With the FRF for SMEs Accounting Framework To the Stockholders ABC, Inc. Independent Auditors Report We have audited the accompanying financial statements of ABC, Inc., which comprise the statement of financial position as of December 31, 20X2, and the related statements of operations and cash flows for the year then ended, and the related notes to the financial statements. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants described in Note 1; this includes determining that the Financial Reporting Framework for Small- and Medium-Sized Entities is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the companys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion

45 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC, Inc., as of December 31, 20X2, and the results of its operations and its cash flows for the year then ended in accordance with Financial Reporting Framework for Smalland Medium-Sized Entities described in Note 1. Basis of Accounting We draw attention to Note 1 of the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with Financial Reporting Framework for Small- and Medium-Sized Entities, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. [Auditors signature] [Auditors city and state] [Date of the auditors report]

46 CPAs, its divisions and its committees. This publication is designed to provide accurate and authoritative information on the subject covered. It is distributed with the understanding that the authors are not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For more information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC